3 November 2015

In January 2016, the Magyar Nemzeti Bank (MNB) will launch its Growth Supporting Programme (GSP) designed to help domestic banks return to market-based financing by gradually phasing out the Funding for Growth Scheme (FGS) and by announcing a new Market-Based Lending Scheme (MLS) providing a positive incentive for banks to boost their lending. The MNB’s aim is to ensure that the domestic credit market functions smoothly after the FGS is phased out gradually and that the stock of bank lending to the economy grows in a sustainable manner with a reduced reliance on central bank funding. As a result of the above programmes, the stocks of corporate and targeted SME loans are expected to increase by HUF 250–400 billion in 2016, which is equal to an annual growth rate of 5–10 per cent. By having access to the MNB’s new instruments, the banks participating in the Market-Based Lending Scheme will automatically undertake an explicit quantity of lending, thereby making it possible to draw a distinction between those banks that are active participants and those that are passive participants of the credit market.

More than 28,000 micro, small and medium-sized enterprises had access to funding in Phases 1 and 2 of the Funding for Growth Scheme (FGS) as well as in the FGS+, in the amount of over HUF 1,800 billion. As a result of the programme, the stock of bank lending to SMEs began to rise again from the end of 2013, after declining steadily between 2008–2013, which has raised domestic economic growth significantly, by 1–1.5 percentage points, over the past two years.

However, market-based lending has not yet recovered: banks’ risk appetite continues to be low. Excluding lending under the FGS, the SME sector has access to finance on unfavourable terms at longer maturities. The objective of the FGS, introduced as a temporary instrument, is to support market building and growth. At the same time, the FGS has increasingly become a standard product of banks, which does not support the restoration of market-based lending over the long term. In view of the above, the Bank has decided to phase out gradually the FGS from January 2016. During the phase-out period, however, it is necessary to help banks switch to market-based lending and to support the transition by introducing new central bank instruments.

In view of the above, the MNB is announcing the Growth Supporting Programme (GSP), which is aimed at ensuring that the return by banks to market-based financing is smooth and that the stock of lending to the SME sector grows by HUF 250–400 billion, i.e. by 5–10 per cent, in 2016.

As part of the GSP, the Bank is launching the third, phasing-out stage of the FGS consisting of two pillars. Within this framework, domestic SMEs will have the opportunity to borrow from banks in the period from early January 2016 to the end of December. Both pillars will be announced with an overall amount of HUF 300 billion.

  • Under Pillar 1, the MNB will provide refinancing for credit institutions at a 0 per cent interest rate, similar to the previous two phases, which they can on-lend to enterprises at a maximum 2.5 per cent interest rate. Compared with the second phase, the range of credit objectives will be reduced and the maximum amount of loans will be lowered to HUF 1 billion, in order to ensure that the new funding limit allows for an as wide as possible range of smaller participants to implement their investment projects.
  • By announcing Pillar 2, the Bank will aim to manage market distortions in long-term foreign currency lending, as enterprises with mainly foreign currency revenues have so far had only limited access to the Scheme, while they have had access to financing on more unfavourable terms relative to their foreign competitors. The MNB will also provide funding to credit institutions at a 0 per cent interest rate, which it will convert into euros against its foreign exchange reserves in the form of a market-priced currency interest rate swap. Credit institutions will be able to on-lend the funds they received under the Scheme to SMEs with natural foreign currency hedging at a maximum 2.5 per cent interest rate.

Simultaneously with the gradual phasing-out of the FGS, the MNB will announce a new package of measures containing positive incentives, supporting banks in switching to market-based lending, in order to reduce risks of low lending activity. The Market-Based Lending Scheme will consist of the following three elements:

  • supplementing the central bank instruments with an interest rate swap conditional on lending activity (LIRS) and a preferential deposit facility;
  • creating incentives through capital adequacy requirements for banks;
  • opportunity for the banking sector to have access to the corporate credit reporting system.

1. The instruments supplementing the central bank instruments provide an incentive for lending through the conditions of access, as the credit institutions participating in the programme will undertake to increase the stock of lending to SMEs. The interest rate swaps conditional on lending activity (LIRS) will promote lending through managing interest rate risks, through the partial assumption of such risks by MNB. The overall amount to be allocated under LIRS is HUF 1,000 billion. LIRS will be available for banks in 2016 over a limited period and at a maximum maturity of three years. A condition of access to the facility is that banks increase their stock of (performing) loans to SMEs by one-quarter of the allocated amount annually, i.e. by HUF 250 billion if the facility is fully allocated. The preferential deposit facility is a supplementary instrument, under which banks will be able to place part of their liquidity in excess of the amount of required reserves on their current accounts at the Bank’s policy rate. The expected decline in banking sector liquidity will give a higher value to the liquidity-enhancing instruments, including the preferential deposit facility. The overall amount of preferential deposit facility introduced as a supplementary instrument is HUF 500 billion.

2. Incentives through capital adequacy requirements for banks are also expected to contribute to an expansion in lending. A business model preferring sustainable lending to SMEs may pose smaller risks to a bank’s operations. In such cases, using a lower supervisory capital requirement may be considered. The related precise rules may be finalised after consultations with the banking sector.

3. The development of a corporate credit reporting system is underway at the MNB, which may be an efficient tool for banks in mapping out credit risks as precisely as possible.

In the preparatory phase of the Growth Supporting Programme, several rounds of constructive consultations were held between the Hungarian Banking Association and the MNB. The MNB has taken into account banks’ suggestions falling within the central bank objectives and has incorporated a large part of them into its programme. By accessing the instruments, the banks participating in the Growth Supporting Programme will be required to undertake an explicit quantity of lending to SMEs. In this manner, the programme will make it possible to draw a distinction between those banks that are active participants and those that are passive participants of the credit market.

The gradual phasing-out of the FGS and the introduction of the lending interest rate swaps and the preferential deposit facility are expected to raise the stock of lending to SMEs by some HUF 250–400 billion in 2016, which is equal to a growth rate of 5–10 per cent annually in lending to the corporate sector and particularly to SMEs. The MNB and the banking sector may achieve the desired turnaround in lending jointly, by working in close cooperation.